How Sony's (SNY) Bungie Acquisition Affects Microsoft's (MSFT) Gaming Ambitions

In 2020, as the pandemic took hold, 50 million Americans took up gaming, an increase of 31% year over year, according to research by investment firm Morgan Stanley. The next year, U.S. games set a sales record of $60.4 billion, an increase of 8% as compared to the previous year. 

The industry's frenetic growth has triggered a wave of acquisitions. Microsoft Corporation's (MSFT) $68.7 billion purchase of Activision Blizzard, Inc. (ATVI) in January was the biggest one. Its rival Sony Group Corporation (SNY) hit back by buying up Washington-based Bungie Games—maker of Halo, which found success on Microsoft's Xbox platform, and Destiny. 

Their moves are important because the two companies are the world's second-and third-largest gaming outfits. What does Sony's latest acquisition mean for Microsoft's gaming ambitions?

A Battle of Two Giants 

Sony's acquisition of Bungie is part of a growing trend of consolidation among gaming companies. As the industry explodes in popularity, its players are busy snapping up rivals and games studios. Already, this year has witnessed three multibillion-dollar acquisitions. The motivations for these acquisitions are various. Further up ahead is a looming metaverse. But the more immediate concerns are the gaming industry's phenomenal growth in the past two years.

While Microsoft's acquisition of Activision Blizzard is bigger than Sony's acquisition of Bungie, the Japanese company is ahead of Microsoft in the industry. Sony's Games & Network Services division reported revenues of $25.03 billion, a record, in the 2020 fiscal year. Microsoft's gaming revenue for the 2021 fiscal year was $15.4 billion.

More importantly, a significant portion of Sony's revenues from gaming came from content and services on its PlayStation consoles. "This significant increase [in profits] was primarily due to the impact of the above-mentioned increase in game software sales, and an increase in Network Services sales, primarily from PlayStation Plus," the company stated in its earnings report. 

That is an important distinction. With overall sales of roughly $6 billion, hardware sales comprised a fraction of overall revenues in the gaming industry. The majority, around 85%, consisted mainly of software sales. Microsoft's Xbox may be a best-seller, but the company has some catching-up to do in gaming software and services.

For example, December 2021's best-selling games were both from Activision Blizzard's Call of Duty franchise. Marvel's Spider-Man and the MLB series from Sony ranked sixth and ninth, respectively, while Microsoft's Minecraft, a $4 billion acquisition made in 2017, was a distant 13th. The difference in rankings suggests that Sony's games development unit has a much more robust presence as compared to Microsoft. 

This could affect future revenues at Microsoft. Console companies, which also act as publishers for some games, earn most of their revenues from licensing. A vertical integration strategy in which the companies control production, marketing, and release of their games could boost revenues. Previous research has shown that vertically integrated games produce higher revenues and sell more units at higher prices than independent games. " … consumers value vertical integration features in their games between $4 and $34 per game," the authors wrote.

Microsoft's landgrab for Activision may have been a masterstroke in vertical integration, but Sony has sufficient ammunition to bolster its lead. For example, Sony's investment in Epic Games, developer of the smash hit Fortnite, provides it with considerable leverage. Microsoft will likely have to make future acquisitions to compete with Sony on an even keel.